Making sure you are on top of your game when it comes to tax returns, requires you to be be in the know about all the latest tax laws and requirements. Of course, paying as little tax as possible is everyone's intention. With recent developments in UK tax laws, we have found it important to discuss rental income tax burden solutions.
What taxes do Landlords have to pay?
Tax on rental income
National insurance contribution
Stamp Duty Land tax
Capital Gains Tax
Historically, buy-to-let mortgages encompassed major tax advantages. Because you only needed to declare rental income after you have paid your mortgage, your property yield was greater. Since April 2017 property income tax game has evolved for landlords.
The UK system of calculating rental property income tax no longer allows all mortgage expenses, from rental income, to become tax deductible. Landlords have been given a new tax credit, which is quite a bit less generous.
It looks like this:
All rental income earned, is taxable before your mortgage payment, and a 20% tax credit for your mortgage interest, is earned. A potentially nasty outcome with financial implication, that could interfere with your cash flow, is considered:
You could be forced into a higher tax bracket. If you are a higher rate taxpayer, you will not receive all the tax back on your mortgage repayments. This means your buy to let property might not show a good return on investment.
How to legally reduce your tax liability and offset additional costs
To maximize your income earned from property rentals, you might consider looking into the following options.
Transfer property to a limited company
Individual property investors would be wise to consider the tax advantages of setting up a company to invest in property. This option is even more lucrative if you are a taxpayer at the higher rates bracket. Which many people have now become because of the erosion of mortgage interest tax relief.
This is a viable consideration. To pay corporation tax is less than individuals paying income tax for people who fall in the higher rate tax bracket. Setting up a company and selling existing properties to it, will help go round individual taxation. Keep in mind that you will likely be liable for stamp duty or capital gains tax in the process.
Transfer ownership of your property to your spouse
Gifting or selling your residential property to your spouse will relieve you from having to pay capital gains tax on the property. However, there are a few special cases where this is not possible.
When the rental income is your spouse’s only stream of income, it becomes another useful way of reducing taxable profit on rental income. They will not be taxed on anything up to their individual personal allowance. Anything over the threshold will be liable to 20% tax.
When gifting or selling a property to your significant other, be sure that you will be around long enough to realize your profits. The only thing we can guarantee is your rental income.
Make the most of rental income allowable expenses
Property maintenance including repair costs and replacing furniture, as well as cleaning and gardening. Letting agency fees, property insurance and others, can all be offset against property income tax.
Keep all your receipts and records for allowable expense claims to ensure you are not paying any unnecessary tax.
More information on allowable expenses is available on GOV.UK
Up your rent
One of the more difficult options to consider is rental increase. Although the amount of tax you pay will not be directly influenced by increasing rental fees, it will help you cover a larger portion of your liability.
Rental markets are struggling to keep up with the demand thereof. Landlords are exiting the market, making it a valid option for property owners. It is obviously important to keep the value in line with other properties in the area as much as possible. It is also advisable to include a rent review process in your rental contract.
Changing to an offset buy-to-let mortgage
You can reduce the amount of mortgage interest you pay by changing to an offset buy-to-let mortgage. Although it has limited availability, it could help you by keeping property invested into your offset mortgage account.
Less mortgage interest paid, shows a higher annual roi (return on investment), offsetting against additional tax that you must pay on your income.
Before you do any of the above mentioned make sure you assess the impact that tax has on your property income.
Partner with the right people to manage your property in London and Surrey
Aston Pearl is a Croydon estate agent that can guarantee landlords their rental income and are experts at property management.
You will have guaranteed rental income from day one regardless of tenants or not.
No voids, only regular rental income in your bank account every single month.
No commission fees are applicable for this guaranteed rent scheme.
For more information on guaranteed rentals, contact us.